Business Development & Investments

The Internet and the cloud has made it much easier for companies to be truly global without the need for on-the-ground infrastructure in different countries. Skype and MySQL are good examples in part because they are pure technology that is fairly language independent (they require their documentation to be multi-national but don’t need to “be there.”)

But for many companies a purely cloud-based approach may not be possible and even when it is a “local flavor” may be required to make US clients comfortable enough to do business. In the extreme case there are enterprise-focused solution providers that sell directly to companies. Unfortunately for these businesses building a local presence is required and typically quite expensive (I will come back to that though.) Companies in this situation are faced with the reality of having to raise “expansion capital” from a venture firm or other funding source to support this level of investment.

What about a company that’s kind of in the middle? They might be based in Germany, France, Italy, Spain or Austria and doing well there, they want to expand their US business but don’t want to spend lots of money. Ideally their US expansion would effectively be bootstrapped and self-financing.

This is the situation we want to examine further to go beyond the obvious step of buying a “.com” URL! Not everyone will agree with these points but I’m writing them from both a pragmatic and an American point of view and some experience in “crossing the pond” in both directions with companies as an advisor.

Here are some steps:

Start a US company. If possible consider actually putting your HQ in the US but if that’s not possible start up a separate company that your firm owns. This can be a Limited Liability Company, C-Corp or even a partnership. Now you can spend your life getting legal, financial and tax advice on this but it’s best to keep it simple (you can change it later if you are successful.) The main point is that you want to be a US business in the US. Also just do it in Delaware which is what everyone else does. Again there are some interesting states that offer alternatives but this isn’t the time to worry about that. Fortunately this process is simple and automated by not just Delaware itself but also supported by companies that do this for you for typically a few hundred dollars and they even act as your local agents for a few hundred dollars a year or less. You should certainly visit the Delaware State site for corporations and also may find this legal site useful. There are scores of online firms that handle the set up and maintenance of a Delaware company and I’ve used three different ones that were all fine. They all have their strengths and weaknesses.

Have a US web presence. And this is not just a “click here for english” on your current site. You should build a unique site in the US and have it hosted there. Although this requires a little more cost and effort it’s very small in comparison to the benefits. You might even find that the costs of service and the quality of support is much better than what you are used to. Now the actual construction of a site requires a slew of choices that go beyond the scope of this report. However we would recommend hosting the site somewhere like Liquid Web. In addition to the web site some combination of online marketing tools like email should be part of the plan as well. Again select a US focused solution from the many out there. Examples include MailChimp, Vertical Response, Blue Sky Factory and Constant Contact. There are dozens of others but these are all very strong players with their own strengths and weaknesses. A blog should also be part of the US presence and will dovetail with the next area. I’m a heavy user of WordPress and find it to be the best combination of power, ease of use, and availability of resources. Some web development tools also include blogging which is probably also fine. I’d take the easy solution if it works and if not just add WordPress.

Do the social networks. There are a few that matter but most importantly get your firm up and running on Twitter and Facebook. Take a little time to understand how to do it and don’t let these get stale from neglect. Watch how leading brands are doing this and approximate that. Also set yourself up on LinkedIn which is where many US professionals will look for you and your background. Be thoughtful about how these networks can help you and your business. Don’t try and move too fast. These are useful not just in promoting your business but also for discovering potential US partners and staff.

Get a US address. You’re going to need one anyway because your Delaware corporate agent (if you go that route versus DIY) doesn’t really provide office management. You need a place to get mail and list as your “place of business” even if you don’t really need a place to do business at this point. Many are familiar with Regus as the leading firm in this space but we would encourage you to stay way from Regus. They are expensive and the atmosphere is mostly not right for startups and technology companies. If you are a financial or legal firm then maybe Regus is for you. Our favorite place in the US is the Cambridge Innovation Center which is just across the river from Boston and on the MIT campus. There are also similar places in NYC and certainly some in SF. Considering travel, cost and time-zones we find the Boston area to be the best location for Europe-based companies. If you want more information and/or an introduction to the CIC please get in touch. As for phones some places like the CIC include a US number in the deal but in any case you will want have a Skype account if you don’t already and plan on using that for your US communication. It may also make sense to get a US cell phone if you will be traveling in the US and/or are often away from Skype.

Find an US resident to act on your behalf. This is a tricky one but what you want is someone who can be your agent when little snafus come up. There are still restrictions that one runs into when signing contracts, setting up bank accounts or filing forms in some places that require a US resident. If you have someone who can act in this capacity without requiring much compensation it will make these easy to overcome. The key here is really finding someone you can trust so a friend or family member in the US can be a good solution. If that’s not possible you should try and find a way to address it. Having a co-founder of the US business is well worth considering.

The next few steps start to include the hiring of US-based staff and that’s a large enough change in scope to demand a separate post. The steps above though go a long way in terms of setting up a real US-based shop.

I’ll end with some common questions:

How much is it going to cost? Of course it’s going to depend on how you do some of these things but I’d ballpark it as follows by item: (1) $500 to setup, then $500 a year for basic administration and filing, (2) site could be $100-500 for tools if you can do it yourself and $5000 or more if you have to hire someone to do it, hosting is about $500-1000 per year depending on the size of your site and traffic, email marketing services range from $30 to $300 per month, (3) most of the social networks are free but it’s worth paying the $240 a year or so for LinkedIn Pro if you are going to want to network, (4) the US address can be as low as $300/year for what is basically a mailbox to $1000-4000/year for a “flex office” which tends to include phone service and a place to sit in the US with access to conference rooms and the Internet. It’s possible to do most of this for under $1000, especially if you can manage to do the website on your own. There are online services that can make these easier that start around $50/month and some email marketing services like MailChimp are even free for up to 500 contacts and scale from there. In the cases where the “flex office” is required the costs are going to be more like $5-6K per year not including travel and may also require opening a US bank account and doing some state filings in addition to the Delaware filings.

What about a hiring a PR firm? Total waste of money. Most firms start at $35K and go up from there. Even a fraction of that is money wasted. If you do most of the steps above you will make huge progress. Even spending on Google AdWords may not be required. On the flip side cultivating some coverage at leading US blogs in your space will be well worth it. For a technology company a mention at TechCrunch or GigaOM is free and worth more. Even businesses that require analyst relations outreach can get that online at much lower cost than what PR firms charge. We’ve been down this road many times and watched lots of money get wasted. Don’t fall for it.

The WSJ recently produced an article noting that some VC partners were on Too Many Boards and companies were finding it hard to get real attention and help from their venture-based board members.

Twenty boards sure seems like too many. Especially when the average is 4 to 5. The numbers are rising because as one VC points out “exits have been few” and with new investments the portfolio is “stacking up.” Some good advice does come from Bob Davoli at Sigma Partners who says the key is to know the individual person joining the board and what they are like rather than just looking at numbers.

More broadly though I think the point is an emerging company needs lots of help. Getting guidance and having contacts made are certainly valuable and important but why not outside members of the team that take on a more active role?

Not surprisingly board members often allocate their time based on their perception of how much their involvement will influence their investment returns. If a company is failing they certainly focus on it to see if they can preserve their capital. Similarly if a company is poised to vault into the big leagues they will focus on that too. The problem comes for the majority of companies that are somewhere in between.

I think there is a market out there for advisors and services who can help startup companies at nominal costs and for durations that match the company needs. Unfortunately today the options for companies are still fairly limited. For example many PR firms still charge thousands of dollars every month for what is a glorified press release service. (Some PR firms are fantastic but that’s the exception rather than the rule and they tend to charge more than many start-ups can rationalize.)

Another concept that I’d love to see more of a performance-based structure for board members and advisors. Why can’t more stock, options and fees be based on contributions and milestones?

Having a more competitive and performance-based approach to board members and advisors is overdue.

There’s been a major kerfuffle on the net led by some self-absorbed Valley types about what an outrage it is for groups of angel investors to charge companies who want to present their plans to them. Defenders of the practice argue that it’s a free market and companies can pay if they chose to. However many venture investors and related types have decided to rail against the practice and take the “outing” of it as some kind of cause. Pulling some facts together that may help entrepreneurs and start-up companies navigate a fund-raising process that is inscrutable would definitely help. Singling out “ante-up” angels is not nearly as valuable.

The fact is there have long been many trade groups and event planners that are “pay to play.” Some of the famous ones like Demo have charged fees that were high enough to attract attention. Many are far more mundane and charge mostly to defray the costs of organizing an event. For example there are some business development events held in the US for European companies that do an excellent job of helping them find potential business development partners. The fees are modest at $4-5K per company but the value proposition is there for anyone to decide if it makes sense for them.

Capital raising is notoriously difficult and if ante-up angels are praying on these poor start-up companies then shame on them. However expertise focused on a specific company situation is a scarce resource and figuring out a way to parcel it out is needed. Everyone wants it but few want to pay for it. Besides it’s been normal for advisors and gatekeepers to charge companies for their services. Sometimes on an contingency basis but none of them can afford to work for free. Companies need help with the process and unless they can manage to attract resources on their own that will invest the time, money and energy that they need there will need to be a fee paid to someone to help. Does your account do your taxes for free? Does a recruiter fill jobs and place candidates without a fee? Do industry research groups consult with you on your products, strategy and positioning for free? Generally speaking the rule of getting what you pay for holds. If there are cases where it doesn’t those businesses and/or models will simply die off.

Lately we’ve even seen companies begin to charge job applicants a small fee to apply for a job. Some people are upset about this too. However it’s a fact that employers need a way to screen candidates and the fee is small. Colleges have long charged application fees and we haven’t heard any complaints about it. These are poor students after all! There’s also something to be said for a price that seems fair. If Harvard starting charging $2000 for the application process there would be an understandable outcry.

Where do we stand on the ante-up angels? We’d advise companies against it. Paying someone to *hear* your story makes no sense. Paying to have them critique, propose or otherwise add some value makes total sense. If you need help we’d say it’s worth spending a small amount on getting the story down and obtaining some help with networking and introductions. Or just network yourself into finding a decent advisor you can trust to help you a bit through the process. That’s our 2c.

No it’s not a bizarre name for a Web 2.0 company or type of cloud computing infrastructure. But we have looked at this investment very carefully over the last few months and are thrilled to find something that offers strong potential returns but sits outside our very concentrated portfolio of technology investments.

Cachaça is sometimes referred to as the “tequila of Brazil” and may follow a similar pattern of adoption in the United States where new foreign spirits like tequila, gin, vodka and scotch have all come to dominate the shelf space behind American bars. (We are still partial to Bourbon and Rye but we know we are in the minority.)

Although huge volumes of cachaça are consumed in Brazil, very little is exported. This is changing not only due to the efforts of Beija but marketing powerhouse Bacardi has acquired a small local producer to popularize the liquor and the famous cocktail, the Caipirinha, globally. (Bacardi paid $20M for Leblon which was still in the early stages of development at the time.)

The founders of Beija know how important marketing and brand is to success in this market. They have developed and delivered an outstanding product in terms of quality and packaging, first in Boston and now in NYC. They have focused on the high end cocktail bars and “mixologists” who are eager early adopters of this new liquor and the number of refreshing and unique drinks cachaça provides.

Beija doesn’t have to be the worlds leading brand to offer attractive investment returns. The global liquor market is dominated by a number of large conglomerates like Brown-Forman (NYSE: BF.A, $49, $7B Cap), Fortune Brands (NYSE: FO, $36, $5.5B Cap), Diageo (NYSE: DEO, $54, $33B Cap), LVMH, and Bacardi among others. They will all end up having their own brands of cachaça as the market develops. Many will also have multiple positions with “super premium,” “premium” and “superior” labels to address the market opportunity.

Our assessment is that Beija has the right ingredients to make it in the market. The valuation parameters are in line with the stage of company development and potential valuations in this market are easy to calculate since they are largely driven by case volume.

Beija cachaça is poured at many (if not most) of the high end bars in Boston today and is rapidly spreading to many more in NYC this summer. It’s already the exclusive cachaça at NYC favorites like the Campbell Apartment in GCT and found in such hip places as Death & Co.

If you’re interested in learning more about Bejia please see the link and feel free to contact us if you’d like an introduction.

One of our first major advisory assignments was to help a small European enterprise software company figure out what to do about the U.S. market. They had a great deal of success in their home country and were ready to expand. By way of example we list out some of the steps along with the overall case study. (This work was conducted over the course of 2006.)

Step one: Is there a meeting of the minds? For an advisory assignment to be meaningful and a good value (no matter how much or how little it costs) there has to be a good relationship in place. This generally means that leads come by way of referrals. Trust and integrity are the foundation of any relationship and may take too long to build from scratch. The first discussion or two can happen via the phone or online but subsequent to that a physical meeting is required.

Step two: Did both sides meet expectations? For the advisor the company and the CEO have to be something they can be enthusiastic about helping. In this case the company has a very powerful and unique enterprise software solution and a CEO who is brilliant but also secure enough to know that he doesn’t know everything and is eager to learn. Similarly the advisor has to demonstrate a depth of knowledge and apparent ability that is consistent with the recommendation of the referral. If these views are mutual the stage is set.

Step three: Can the advisor add meaningful value? In some cases the foundation is there but what the company needs is outside the scope of what an external advisor can deliver. Some cases it might be a limit of the advisor (we don’t know much about improving semiconductor device yields in old fabs for example…) and in others a major industry shift and/or management turmoil has left a company in very bad shape. In the latter case an advisor might be able to provide some advice on the potential workout options but it’s not the type of value add we seek out. In this case the company had little knowledge of the U.S. enterprise software market (one of our strengths) and while their marketing materials were in the English language, they didn’t exactly play to the American style. It was clear that what the company needed, and what we could provide were a perfect fit.

Step four: The swag. Although it can happen earlier it is at this point that a small moment of truth has to occur where the client and the advisor touch on what this is going to cost and if there is budget for it. This is also a moment to see how you both respond to a little serious mutual discussion. So this is a critical test of your ability to work together on more than one level. Our services are not inexpensive but we divide them into phases and tie them to milestones so that the costs and benefits are matched and measured. Our goal is to add the maximum value that the company needs and then let the company move on. In this case there was a substantial amount of work so it was easy to create a Phase I with a number of activities and deliverables. We do an estimate of how much time is involved and then just put a price on it. We don’t track hours or phone calls or how many times we thought about the company while we were doing something else. As a rule of thumb any prospective client should figure that a phase I is likely to cost $10-20K and last from one to three months.

Step five: The company visit. Typically the writing and approval of the formal contract takes a week or two. During this time it’s a good time to have the company visit. There are lots of ways to approach this financially but we generally like to meet in the middle which for us means that the company pays for the trip and we donate the day without any consulting fees. Obviously both sides only want to do this when they are pretty sure that an engagement is forthcoming. This is the day for the advisor to meet the other members of the management team, potentially the board and begin to get some of their initial work organized. This is a fun day and it should feel great. If it doesn’t both sides should reevaluate.

Step six: Doing the work. The first phase of this project was very active. The first thing we did was set up a large number of meetings for the CEO to talk to potential customers, investors, industry experts and even facilities providers. During the trip we used all the non-meeting time to actively build the US marketing message and the business development plan that would be presented to the Board of Directors. In this case our efforts focused on:

What do potential customer environments look like and how ready are they to invest in this technology? Basically an anecdotal analysis of how market readiness.

How does the message resonate with U.S. prospects, potential investors and partners? This is valuable input in terms of how much tweaking the positioning will need and what direction our initial steps should go in.

What’s would our U.S. operation look like? What budget figures should be used in building the board presentation? This is the operational piece needed for the board to decide if it makes sense to make the investment in developing the U.S. market.

In this case we finished up the first phase and got a green light to proceed by the board. We’ll save the next two phases for future updates here.

Board members have a broad range of usefulness and value. Even good ones limit their time and attention to attending several meetings a year in person or by phone to chime in on key issues facing a company.

Most companies are well-served to have the benefit of additional experience present during these boardroom discussions. However most companies could benefit much more if board members would invest some additional time and effort behind helping the company accomplish some specific goals.

Our process typically involves projects that may take anywhere from three to twelve months to implement and then make them part of an advisory role with the company. For example it may be time to expand the company into a new geographic market. How should it be done? What will the costs be? What are the likely results and impact on the company? Other examples range from finding new capital for expansion, delineating company positioning and potential M&A partner, expanding business development to refining sales and marketing messages.

Being an active advisor means working on these objectives with company management and presenting results and next steps to the rest of the team and board of directors. Because we have an extensive network of experts across multiple areas of technology, market development, management and finance we can bring the right level of resources to the task only when required.

By adding actions and concrete plans to opinions and comments we feel we can provide a much more valuable resource to a busy CEO and board than by being just another voice to be heard.

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